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Subrogation allows an insurer to step into the shoes of the policyholder and file a claim against a third party who caused the damage. The theory behind a subrogation clause is that the insurance company should not have to bear the loss when someone else was to blame for the damages. Once the insurance company has paid the claim to the policyholder, it may look to see whether it can take legal action against another party to recover its losses. These claims are an important tool for an insurance company to help minimize its own losses and manage its risk.

Therefore, subrogation will be incorporated into practically every single insurance contract. These contracts will also include language that prohibits the insured from taking any action that would interfere with the insurance company's ability to recover its own losses.

Waiver of Subrogation Clauses Affect the Insurance Company

However, two private parties may agree to contractual language that limits an insurance company's right to subrogate and pursue the responsible party. There is an inherent conflict between waiver of subrogation and contractual language that prohibits an insured from interfering with the insurance company's right to recover. Nonetheless, waiver of subrogation clauses are still common and they are often upheld by courts.

A waiver of subrogation clause is intended to preserve the relationship between the two parties to the contract and keep them from having to engage in costly litigation. However, the waiver of subrogation comes at the expense of the insurance company that has written the policy. An insurance company has legal rights, and a waiver of subrogation clause takes some of them away. Simply stated, with nothing else at play, two parties cannot privately agree to contractual language that strips the legal rights from a third party that has no say in the matter.

Waiver of Subrogation Clauses May Conflict with an Insurance Policy

The question is how a policyholder can agree to a waiver of subrogation and not be deemed to have breached their insurance contract. In most cases, the policyholder will need to present the contract to the insurance company and inform them of their intent to sign the waiver clause. The insurance company would then review the contract and determine whether to accede to the clause. Since insurance companies are in the business of pricing risk, they will review the policy and potentially increase their rates. A waiver of subrogation means that an insurance company has a higher chance of paying out losses that it cannot recover itself. Therefore, an insurance company must charge more if the insured plans on agreeing to this clause.

A waiver of subrogation is common in the construction and real estate industries. A construction job site owner would otherwise be hesitant to hire a contractor or subcontractor if they may be held responsible for damages that occur during construction. Landlords often require waivers of subrogation in leases so they cannot be sued by insurance companies when a tenant suffers damages that are paid by renters' insurance. For example, a social guest of a tenant may suffer a slip-and-fall injury that was the landlord's fault. The waiver of subrogation clause would preclude the insurance company from going after the landlord to recover the cost of the claim.

Waiver of Subrogation Clauses Are Not Always Enforceable According to Their Terms

Waivers of subrogation are not always as airtight as you would think. The language of the provision may be sufficiently ambiguous so as to cause the court to either decline to enforce it entirely or to find a way to allow the insurance company to subrogate, notwithstanding the language. In addition, a waiver of subrogation clause may not be valid if it invalidates the insurance coverage. In other words, the language of the subrogation clause may not be automatically enforceable just because it appears in a contract.

The language of the waiver of subrogation may be strictly construed. The reason why courts take a limited view of waiver of subrogation clauses is that they alter the right of a third party (the insurance company). Therefore, the parties who negotiate the waiver of subrogation must be clear about their intent. They cannot count on a court to come to their aid if they leave out language or include terms that are ambiguous.

The waiver is only enforceable as to the specific language in the clause and the specific context in which it appears. A court will not infer anything, nor will it go beyond the exact language of the waiver. For example, if a waiver of subrogation applied only to a specific loss, a bar on recovery will apply only to that loss. However, the party that requests a waiver of subrogation will usually try to make the language as broad as possible to provide itself with the maximum amount of protection. Nonetheless, a party might fail to use the most effective or direct language, especially when it is relying on boilerplate contract language.

However, a broad waiver of a subrogation clause may also be strictly enforced. If there is clear waiver language that applies to all losses caused under the policy, or if any subrogation is inconsistent with the express language, there can be no subrogation. These contractual provisions exist for a reason, and a court will not always decline to enforce them in light of the parties’ intentions. In other words, a waiver of subrogation clause is not automatically invalid as a matter of public policy.

There are enough issues with a waiver of subrogation clause that it may not always be enforceable. Insurance companies should consult with an attorney to learn whether there is any opening to pursue subrogation even when there is a waiver clause because its presence is not always a death sentence for subrogation. There are cases when a recovery may be available outside the scope of the language of the subrogation waiver.